Loan charge repayments stand, new loans are taxable

In The Queen (on the application of Iain Clamp and Jeremy Beck) v HMRC [2021] EWHC 2360, the Court of Appeal dismissed an application for judicial review of HMRC’s decision to deny a request to reinstate loans repaid to avoid the Loan Charge and allow them to be redrawn without a tax charge.

Mr Clamp had participated in an Employee Benefit Trust tax planning scheme whereby he and his wife had received loans totalling £1,885,000 prior to the introduction of the Part 7A ITEPA 2003 Disguised Remuneration anti-avoidance rules on 9 December 2010.

• When the Loan Charge was announced in 2016 Mr Clamp took steps to repay the loans prior to the April 2019 deadline. He re-mortgaged his house and sold another property to fund this.
• In late 2019, following an Independent review, changes were announced to the Loan charge which meant that loans taken before 9 December 2010 fell out of scope of the charge.
• Mr Clamp wrote to HMRC asking them to treat the repayment of the loans as if it had never taken place, tax the loans as if they had never been repaid and thereby allow him to redraw the funds without a tax charge.
• HMRC refused to consider this confirming that should he redraw the funds this would be a relevant step within Part 7A and subject to Income Tax and National Insurance Contributions accordingly. There was no statutory route to allow them to agree to Mr Clamp’s request and they would not provide an extra-statutory assurance.
• Mr Clamp sought a Judicial Review of HMRC’s decision.

The Court of Appeal dismissed the application for Judicial review. HMRC did not have the power to agree to Mr Clamp’s proposals therefore their decision not to agree to them could not be an illegal decision.

• HMRC cannot concede that a tax which Parliament has clearly imposed should not be payable as a matter of principle or policy, or by reasons of equity.
• Since HMRC had formed a clear view that Part 7A would apply a tax charge to a redrawing of the loans, they did not have any discretion to then agree that there should be no charge on the basis that another view of the legislation was possible or that it would be more equitable for there to be no such charge.
• HMRC had to base their decision on the facts which were that the loans had been repaid. The repayments had not been legally set aside and Mr Clamp had not made a mistake in making the repayments as he decided to do make them based on the law in place at the time.
• Mr Clamp’s route of redress was to go ahead with the transaction i.e. redraw the loans, then challenge HMRC’s treatment of them as taxable by appealing the assessments HMRC would ultimately issue.

Comment

Mr Clamp will not be alone in having hastily repaid loans to avoid the loan charge only to find that those loans then fell out of scope of the charge due to the date they were taken. His former colleague Mr Beck was in the same position but chose to settle his position with HMRC withdrawing from the Judicial Review proceedings.

Whilst it may seem harsh that such taxpayers will now face a tax charge that could have been avoided had the Loan Charge review been concluded earlier or differently, anyone taking advice should have been aware that redrawing their loans would result in a Part 7A tax charge and that, even if they did avoid the loan charge, this would not be the end of HMRC’s attempts to subject their loans to tax.

Useful guides on this topic

Disguised remuneration loan charge
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?

Disguised remuneration 2020 settlement opportunity
What is HMRC's position on disguised remuneration loans where settlement was not reached by 30 September 2020? Can a settlement still be reached?

FAQs for Disguised Remuneration Settlements
Can I just repay my loans? Which is cheaper: the loan charge or settling? How much will it cost to settle? And many other FAQs.

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

The Queen (on the application of Iain Clamp and Jeremy Beck) v HMRC [2021] EWHC 2360